Returns Are Gaining Momentum At PACCAR (NASDAQ:PCAR)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in PACCAR's (NASDAQ:PCAR) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for PACCAR:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = US$3.3b ÷ (US$31b - US$5.3b) (Based on the trailing twelve months to September 2022).

Thus, PACCAR has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Machinery industry.

View our latest analysis for PACCAR

In the above chart we have measured PACCAR's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PACCAR here for free.

So How Is PACCAR's ROCE Trending?

The trends we've noticed at PACCAR are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, PACCAR has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 2 warning signs with PACCAR (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While PACCAR may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.